Win98 would be a good upgrade. At that age; RAM will be cheap; but hard to find. You can forget about WinXP; and while it'd run Millenium; please don't bother.
A 266 won't cope with IL-2.
On the other hand; it'll fly Red Baron II; European Airwar and Air Warrior just fine.
All three can be flown online head to head; Red Baron still has multiplayer servers up.
Additionaly; I believe it'd cope with versions 2.XX of Warbirds; which had; I believe an offline element; and there's still a very lively version 2 community (ask Baroda

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OTOH; if you're up to it; it'd make a good Linux box; and there are Linux flight sims around.
Hajo: I'd imagine those Gamestorm disks have the online only front end for AW; with no offline element. However; the full CD version of AW can be found on the 'net.